Explanatory Memorandum to COM(2011)510 - System of own resources of the EU - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2011)510 - System of own resources of the EU. |
|---|---|
| source | COM(2011)510  |
| date | 29-06-2011 |
Contents
- 1.1. The EU financing system is outdated
- 1.2. A new paradigm for EU financing
- 1.3. The Lisbon Treaty creates a new legal framework
- 2.1. Simplifying Member States' contributions
- 2.2. Introducing new own resources
- Estimated evolution of the structure of EU financing (2012-2020)
- VAT-based own resource 14. 11. - -
- 2.3. Reforming the correction mechanisms
- Evolution of key parameters (1984-2011)
- Source: European Commission, DG Budget
- 3. THE OWN RESOURCES PACKAGE
- 3.1. The legal instruments
- 3.2. Key role of the own resources Decision
- 3.3. Implementing regulation
- 3.4. Making own resources available
The EU financing system has evolved considerably since 1957. It relied first mainly on contributions from Member States. From 1970, a system of own resources ensuring the autonomy of EU finances was put in place. This was initially based primarily on traditional own resources linked to EU policies but the progressive development of the VAT- and GNI-based own resources marked a shift towards a financing mainly based on statistical aggregates, which display no link to EU policy priorities.
In parallel to the evolution in the composition of own resources, a number of correction mechanisms were introduced based on principles set out at the Fontainebleau European Summit in June 1984. In particular ' any member State sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction at the appropriate time '. These mechanisms are a collection of diverse measures, resulting from successive negotiations which have tended to add new measures to the body of existing corrections.
The report on the operation of the own resources system i demonstrates that the current financing system performs poorly with regard to most assessment criteria. The financing system is opaque and so complex that only a handful of specialists fully understand how it works. This limits democratic oversight of the system. Moreover, many Member States perceive the system to be unfair. Large contributors to the budget consider that their net contributions are too high, whereas a number of Member States benefitting from redistributive policies, such as cohesion, face increased contributions to the EU budget to finance correction mechanisms.
More importantly perhaps, the way the EU budget is financed – with contributions from Member States to the EU being seen solely as expenditures by many national politicians – inevitably creates a tension which poisons every debate about the EU Budget. The progressive development of correction mechanisms is just one symptom of this problem. The pressure to pre-determine national allocations is another. The increasing focus on a narrow accounting approach with the main objective of maximising returns not only colours public debates about the value of EU spending. It also leads some people to question the benefits of EU membership itself.
The difficulties encountered in achieving agreements on budgetary matters in the EU in the 21st century partly result from an inadequate organisation of EU public finances. For many years, EU financing has primarily been treated as an accounting mechanism with two main objectives: ensuring sufficient financing of EU expenditures and incorporating the increasing number of correcting mechanisms. As explained above, this approach has reached its limits. It is now time to envisage a different approach to EU financing.
Considerable challenges in the area of public finance and emerging priorities affect deeply embedded notions related to the EU budget. A new paradigm for EU financing is emerging, based on two pillars.
Firstly, the EU financing system could play a substantial role in the Union-wide budgetary consolidation efforts. By 2010, following the global economic and financial crisis, the total yearly deficit of the EU-27 Member States amounted to an estimated EUR 826.9 billion i. Public deficits in several of the largest Member States were actually bigger than the size of the entire EU budget. Recent months have highlighted persistent difficulties faced by a number of Member States. Budgetary consolidation efforts will be compounded by the cost of ageing populations i and other challenges, such as climate change. In this context, five heads of States or governments stressed that 'the next multiannual financial framework will come as Member States make extraordinary efforts to clean up public finances' i.
Further reinforcing budgetary discipline at EU level will affect all aspects of the EU budget – not only EU expenditures, but also EU revenues. Developing the own resources system will contribute to the wider budgetary consolidation efforts undertaken by Member States. The progressive introduction of new resources opens the door for other resources to be reduced, phased-out or dropped. As a result Member States contributions to the EU budget will diminish and Member States will have an additional degree of freedom in managing scarce national resources. As indicated in the EU Budget Review, introducing new own resources "is not an argument about the size of the budget – it is a debate about the right mix of resources" i.
Second, except for the traditional own resources (mainly customs duties originating from the customs union), the EU resources currently display almost no link to - nor do they support - EU policy objectives. Yet, as indicated in the EU Budget Review, the introduction of new own resources could "mirror the progressive shift of the budget structure towards policies closer to EU citizens and aiming at delivering European public goods and a higher EU added value. It could support – and be closely linked to – the achievement of important EU or international policy objectives, for instance in relation to development, climate change or the financial markets".
New revenue streams can be developed taking advantage of a supranational approach and the critical mass that can be achieved at EU level. Where the mobility of some tax bases is too high to allow effective action by Member States acting alone, or where limited actions by some Member States but not by others create a fragmentation of the Internal market, EU action can add value. Financial sector taxation is particularly relevant in this respect. In its October 2010 communication on financial sector taxation the Commission indicated that new financial sector taxes 'could help to create the conditions for more sustainable growth, as envisaged in the Europe 2020 strategy' i. The Commission has announced a legislative proposal for an EU financial transaction tax in the autumn. Moreover, further developing the VAT system in the context of a new own resource could also reinforce the Internal market and lead to economic efficiency gains.
Reshaping the foundation of the EU financing system will generate a debate on the incidence of specific resources, away from an accounting approach limited to net balances calculations.
At the same time, important elements of the current financing system need to be preserved, such as the traditional own resources and a residual GNI-based own resource permitting budgetary stability and a balanced budget. But the latter can be achieved with a smaller, residual GNI-based own resource and with a fundamentally different mix of resources.
The Treaty on the Functioning of the European Union (TFEU) introduces important changes, not only for EU budgetary procedure, but also the way the EU budget is financed. Two treaty provisions deserve particular attention in this context:
1. Article 311 i TFEU now provides that the Council 'may establish new categories of own resources or abolish an existing category' in the context of an own resources Decision. This opens the door to reducing the number of existing own resources and to creating new ones.
2. Article 311 i TFEU newly provides that the "Council, acting by means of regulations in accordance with a special legislative procedure, shall lay down implementing measures for the Union's own resources system in so far as this is provided for in the [own resources] decision". This provision introduces the possibility of defining specific implementing measures related to the own resources system in an implementing regulation within the limits set out by the own resources Decision.
The Commission proposals make full use of these new possibilities by proposing the elimination of the VAT-based own resource and the creation of new own resources, and by proposing a new organization of implementing measures for the own resources system.
The opportunity offered by this new framework has been taken to make the system sufficiently flexible within the framework and limits set out by the own resource Decision by placing all the practical arrangements for the Union’s resources which should be governed by a more streamlined procedure in an implementing regulation rather than in the Decision itself. These proposals reflect the intentions of the legislator expressed in the Convention on the future of Europe and endorsed by the subsequent intergovernmental conference.
2. THREE PROPOSALS – ONE DECISION
The proposed own resources Decision includes three main elements: the simplification of Member States' contributions, the introduction of new own resources and the reform of correction mechanisms. The Commission report on the operation of the own resources system highlights how each of these proposals relates to- and complement the others. Taken together these proposals constitute a balanced package which must be looked at as a whole in the context of a single decision.
The Commission proposes that the VAT-based own resource be eliminated in parallel with the introduction of new own resources. This is in line with the views expressed by most Member States and the EU institutions in the consultations linked to the Budget Review.
The existing VAT-based own resource is complex, requires much administrative work to arrive at a harmonized base, and offers little or no added value compared to the GNI-based own resource. Its removal will considerably simplify the national contributions and reduce the administrative burden for both the Commission and Member States.
Considering the administrative complexities related to this own resource and the low call rates currently in place, phasing it out step-by-step would be less efficient than a fully-fledged elimination on a given date. It is therefore proposed to abolish this resource on 31 December 2013. Should the Decision enter into force at a later date, this provision will be enacted on retroactive basis, following a common practice in past revisions of the own resources decisions. Using 31 December as an end point will avoid calculating the resource for a fraction of a given year.
Following the ending of the VAT-based own resource, further activity will be required: managing the annual VAT statements for the year preceding the ending of the resource, undertaking the annual VAT balance exercise, making controls to give assurance on the accuracy of the calculations, completing the supervision cycle, managing outstanding reservations, infringements, corrections and accounting reconciliations. Final extinction of all VAT-based own resource related activities will take several years.
The Commission identified six potential candidates as own resources in the EU Budget Review. These were subject to a thorough analysis, particularly featuring the assessment criteria set out in the Budget Review.
This analysis highlighted the following key elements:
3. Financial transaction taxation (FTT) could constitute a new revenue stream, which could reduce the existing Member State contributions, give national governments extra room for manoeuvre and contribute to the general budgetary consolidation effort. Although some form of financial transaction taxation already exists in a limited number of Member States, the analysis also made it clear that action at EU level could prove both more effective and efficient than uncoordinated action by Member States given the level of cross-border activity and high mobility of the tax bases. Furthermore, it could play a role in reducing the existing fragmentation of the Internal market. The Commission will therefore present a proposal for an EU financial transaction tax in the autumn of 2011. A financial transaction tax that could be collected at EU level would reduce the juste retour problems observed in the current system. The EU initiative will constitute a first step towards the application of a FTT at global level.
4. The development of a new VAT resource would bring a new impetus to the development of the Internal market by reinforcing harmonization of national VAT systems. The new VAT resource would be one facet of a markedly revised VAT system in the EU in the wake of the Green Paper on the future of VAT. The new initiative will include the elimination of a number of exemptions or exceptions which are detrimental to the proper functioning of the Internal market and the measures to reduce VAT fraud in the EU.
5. The analysis showed that these own resources could be introduced at EU level during the 2014-2020 period following a suitable period of technical preparation. Combining these own resources would bring additional advantages compared to introducing only one new own resource. It would ensure a fair distribution of impact across the various Member States and the critical mass necessary to substantially reduce the existing Member States contributions to the EU budget.
On the basis of its analysis, the Commission proposes the introduction of a financial transaction tax own resource from 1 January 2018 at the latest and a new VAT resource from 1 January 2018 at the latest. The timing of introduction of these new own resources reflects the time needed for completing the legal framework, and adopting and implementing the relevant legislation. The Commission will present the relevant detailed regulations or amendments to existing legal acts as well as the related implementing regulations pursuant to Article 322 i TFEU by the end of 2011.
The resulting estimated impact on the structure of own resources is summarized in the table below. It shows the shift from the existing national contributions towards the new own resources. The new own resources would finance around 40% of EU expenditures. Traditional own resources would account for close to 20% of the total. The GNI-based own resource would remain the single most important resource financing about 40% of the budget.
Draft budget
EUR billion % of own resources EUR billion % of own resources
Traditional own resources 19. 14. 30. 18.
Existing national contributions of which 111. 85. 65. 40.
GNI-based own resource 97. 74. 65. 40.
New own resources of which - - 66. 40.
New VAT resource - - 29. 18.
EU financial transaction tax - - 37. 22.
Total own resources 131. 100. 162. 100.
The 1984 Fontainebleau European Council set out important guiding principles to ensure fairness in the EU budget. It indicated in particular that 'expenditure policy is ultimately the essential means of resolving the question of budgetary imbalances'. It acknowledged, nevertheless, that 'any member State sustaining a budgetary burden which is excessive in relation to its relative prosperity may benefit from a correction at the appropriate time'.
These principles have been confirmed and consistently applied in successive own resources Decisions. Today, temporary mechanisms of correction are granted to four Member States but they will end in 2013. The correction granted to the United Kingdom (UK) and rebates on its financing for four Member States (Germany, the Netherlands, Austria and Sweden), as well as the hidden correction consisting in the retention, by way of collection costs, of 25% of the amounts collected by the Member States for traditional own resources, will continue to apply until a new own resources Decision enters into force. In the context of this in-depth revision of the EU financing, a fresh look at these correction mechanisms is necessary.
Two important lessons emerge from the analysis of the current system:
Firstly, the objective situation of a number of Member States has evolved strongly over time. This must be properly reflected in the corrections system.
On the basis of the Fontainebleau principles, the UK correction was fully justified when it was set up in 1984. At the time, the UK, one of the poorest Member States, was one of the largest net contributors to an EU budget consisting mainly of agriculture expenditure. It contributed a relatively large amount to an EU financing system heavily reliant on the VAT-based own resource, the base for which was particularly large in the UK.
The objective conditions underpinning the current correction mechanisms have evolved considerably since 1984. The share of the CAP in the EU budget and VAT-based financing decreased considerably. Most importantly, the UK is now one of the more affluent EU Member States. On the basis of these elements and an assessment of the UK's budgetary burden and relative prosperity compared to that of other Member States, the UK correction should be re-assessed.
Share of CAP in budget (% of total) 69% 50% 44%
VAT-based contribution (% of total) 57% 16% 11%
UK prosperity (GNI per capita PPS) 93% of EU- 117% of EU- 111% of EU-
On the basis of the financial framework 2014-2020 proposed by the Commission i and even allowing for the full cost of enlargement to be fairly distributed among the richer Member States, it would appear that a limited number of Member States, including the United Kingdom, will still be faced with a budgetary burden that might be considered excessive when compared to their relative prosperity.
This Decision therefore proposes the inclusion of temporary corrections in favour of Germany the Netherlands, Sweden and the United Kingdom from 2014. These corrections must reflect, inter alia, the important developments in the financing of the EU set out in this Decision, the evolution of expenditure proposed in the financial framework including the completion of the phasing-in of expenditure in those Member States which acceded to the EU in 2004 and 2007, and the high level of prosperity achieved by the above-mentioned Member States.
Secondly, the new system of correction must be transparent and simple, genuinely open to public and parliamentary scrutiny, predictable and efficient. It must also ensure an equal treatment of the Member States.
As it is calculated today, the UK correction is a hugely complex mechanism. It incorporates intrinsically perverse economic incentives, not least the automatic cancelling out (via a decrease in the correction) of EU aid paid to the UK for example when catastrophes, such as flooding, occur. It is also the basis of rebates on the financing of the UK correction for Germany, the Netherlands, Austria and Sweden. With the elimination of the VAT-based own resource, some data essential for calculating the UK correction will no longer be available, which adds a technical argument in favour of an in-depth revision of the mechanism.
The Commission therefore proposes a new system of lump sums to replace all pre-existing correction mechanisms as of 1 January 2014. Transforming the current corrections into a lump sum gross reduction on GNI payments offers clear advantages compared to any alternative formula, including a generalised correction mechanism as the Commission proposed back in 2004 i. The amounts of the lump sums are based on current assumptions independent of the introduction of new own resources.
The updates for the UK corrections of 2010, 2011 and 2012 will be treated under the old system for reasons of coherence and continuity, but the UK correction for 2013, which was to be budgeted in 2014, will be replaced by the new system of lump sum corrections. These corrections will be financed in a fair and transparent manner whereby each Member State contributes in proportion of its relative prosperity (defined by its GNI at market price).
In the same spirit of transparency and fairness, the Commission proposes the elimination of the hidden correction consisting in the retention, by way of collection costs, of 25% of the amounts collected by the Member States for traditional own resources. In view of the proposal to incorporate the corrections into lump sums, the retention should be restricted to 10%, in line with the system in place until 2000.
The Treaty on the Functioning of the European Union (hereinafter 'TFEU') contains the provisions underpinning the EU financing system and, in particular, its own resources. It confirms the key role of the own resources Decision, which should include the main elements of the system.
The TFEU also includes two provisions regarding the implementation of the own resources Decisions instead of one only in the previous Treaty on the European Community:
6. Article 311 i TFEU newly provides that the "Council, acting by means of regulations in accordance with a special legislative procedure, shall lay down implementing measures for the Union's own resources system in so far as this is provided for in the [own resources] decision. The Council shall act after obtaining the consent of the European Parliament".
7. Article 322 i TFEU provides that the "Council, acting on a proposal from the Commission and after consulting the European Parliament and the Court of Auditors, shall determine the methods and procedure whereby the budget revenue provided under the arrangements relating to the Union's own resources shall be made available to the Commission, and determine the measures to be applied, if need be, to meet cash requirements".
The implementing measures for the own resources system thus stem from two articles of the TFEU and have different adoption procedures: consent of the European Parliament is necessary for the adoption of measures under Article 311 i TFEU and it is consulted for measures under Article 322 i. The implementing measures under Article 311 i TFEU need to be provided for in the own resources Decision, whereas Article 322 i TFEU defines that measures must be made for making EU budget revenue available and, if need be, to meet cash requirements.
This poses the question of which elements should be defined in the own resources Decision itself and which implementing measures should be included in which regulations. When the treaty was drafted the intention of the legislator was that "the system of resources should distinguish between two legal bases, each with its separate procedure. One for setting the ceiling of own resources and hence the size of the Union’s budget and for creating new resources, which would be governed by the more cumbersome procedure under the [Treaty] [...]; The other concerning the practical procedures for the Union’s resources, which would be governed by a more streamlined procedure: adoption by the Council by a qualified majority […] with the assent of the European Parliament" i.
The proposed organisation of the legislative framework for the own resources system closely follows this logic by setting out the system in the own resources Decision and providing for all the practical aspects in the relevant implementing regulations.
As the key legal instrument underlying the entire own resources system, the own resources Decision will continue to include the main elements of the system. In the context set out by the TFEU, it should not necessarily be revised with each new financial framework. It should rather constitute a solid, stable, and long-lasting foundation on which the own resources system is built. Its unanimous approval and ratification by the Member States permit a full parliamentary scrutiny and ensure that national sovereignty is respected.
The proposal essentially maintains the structure of the current own resources Decision and contains many of the existing provisions. However, some substantial modifications are also included:
8. the ending of the VAT–based own resources on 31 December 2013 and the inclusion of a provision dealing with its phasing-out in the final provisions.
9. a list of new own resources, including the timing of their introduction and relevant limits to their application. In particular, the Decision contains a maximum limit to the tax rates applicable to the new own resources, whereas the implementing regulation pursuant to Article 311 i presents specific rates. This arrangement provides for both the necessary control of tax rates by the Member States and their respective parliaments and for some flexibility under the democratic oversight of the European Parliament. This flexibility will be particularly useful at early stages of the implementation of the new own resources, when uncertainties as to their precise impacts will be highest. The specific rates for financial transaction taxation will be proposed together with the concrete legislative proposal in the autumn;
10. the provisions related to the correction mechanisms and the ending of the current UK correction. The Decision defines the lump sum reduction on GNI payments attributed to each of the Member States concerned for every year. The Decision includes an article on the financing of these corrections, which would be based on the relative prosperity of all Member States;
11. the removal of provisions dealing with the definition of GNI for own resources purposes and the recalculation of own resources ceilings in case of significant changes to GNI. This is a technical issue, which is addressed in the implementing regulation under Article 311 i TFEU;
12. the introduction of a new article detailing the elements to be included in implementing regulations pursuant to Article 311 i TFEU and Article 322 i TFEU.
Compared to the own resources Decision 2007/436/EC, the proposed new own resource Decision is more transparent and can be easily understood by EU citizens and members of the EU and national parliaments.
The new implementing regulation pursuant to Article 311 i TFEU, contains all those practical arrangements for the Union’s resources which should be governed by a more streamlined procedure in order to make the system sufficiently flexible within the framework and limits set out by the own resource Decision, with the exception of those aspects of the own resources system that relate to the making own resources available and to meeting cash requirements (see section 3.4 below).
Provisions of a general nature, applicable to all types of own resources and for which appropriate parliamentary oversight is particularly important have also been included in this implementing regulation. This means in particular aspects of control and supervision of revenues and the related powers of Commission inspectors.
Accordingly, the following provisions, set out in accordance with the list drawn in the own resources Decision, can be found in this implementing regulation:
13. the tax rates and the rates of call applicable for each of the own resources established in the Decision. This allows limited flexibility within the limits set out in the own resources Decision. In the absence of such flexibility, the ability to make necessary and timely adjustments to own resources would be impaired by the onerous and lengthy procedure foreseen for the adoption of own resources Decisions;
14. the reference Gross National Income (GNI) pursuant to the European system of national and regional accounts (ESA) and the provisions in case of significant changes thereto (the refinement of GNI measurements in the context of revisions to the ESA can impact upon the own resources ceilings);
15. the adjustment for the annual budgetary balance. Whereas the general principle of surplus carry-over is set out in the Decision, the implementation measures are set out in this regulation;
16. the provisions concerning control and supervision, including supplementary reporting requirements.
A number of these measures are currently included in Regulation 1150/2000 namely point i and certain elements of point i relating notably to the reporting of entitlements, frauds and irregularities and the arrangements for the Advisory Committee on Own Resources (ACOR). As these items are not directly related to making own resources available nor to cash requirements, these items logically find their place in this implementing Regulation. The opportunity has also been taken to simplify the current legal framework by taking over and update the provisions related to the powers and obligations of Commission inspectors previously included in Council Regulation 1026/99, which is thus to be repealed following the adoption of this Regulation.
Combined with the own resources Decision, this implementing regulation ensures that any technical adjustment to the system has been subject not only to approval by the national legislatures, but also to the consent of the European Parliament.
As a complement to the own resources Decision and the implementing regulation pursuant to Article 311 i TFEU, regulations pursuant to Article 322 i TFEU should comprise the elements concerning making own resources available and the measures to meet cash requirements.
The Commission proposes a two-steps approach.
First, as part of this own resources package, it proposes to include in a new Council Regulation pursuant to Article 322 i TFEU the provisions necessary to determine the methods and procedure whereby Member States make available to the Commission the traditional own resources (TOR) and the GNI-based own resource. This document also includes the measures to be applied, if need be, to meet cash requirements.
These practical arrangements implement the system set out in the own resources Decision in respect of the establishment of TOR, conservation of supporting documents, administrative cooperation, accounts to be kept for own resources, the timing for making them available and for making adjustments and, where necessary, provisions concerning cash management and irrecoverable amounts.
In practice, the proposal incorporates the provisions of Council Regulation (EC, Euratom) No 1150/2000 i with the exception of those not strictly related to the making available of TOR and the GNI-based own resource or to cash requirements. For reasons of clarity and rationality, and in the context of the own resources package, Regulation No 1150/2000 should therefore be recast. This does not entail material changes in the existing provisions. A very small number of substantive amendments are however needed to reflect recent experience in the management of TOR and the GNI-based own resource by the Commission.
Second, provisions will be needed to take account of the proposed new own resources. These could include the definition of the chargeable event; the tax point to tie the chargeable event to an accounting entry; the form and frequency of the declaration or statement to be made to the Commission; the setting out the mechanisms by which payment is to be made or the resources made available; the applicable sanctions; the circumstances in which corrections can be made and instructions concerning the time limits for conserving supporting documentation.
Provisions covering the relevant topics will be needed for the proposed new own resource and will be included in separate Regulations, as appropriate.